BlackRock’s Fink and UBS’s Weber back new sustainable investment ‘taxonomy’

New initiative from the Institute of International Finance

BlackRock’s Larry Fink and UBS chair Axel Weber are backing a new three-point, high-level, sustainable investment ‘taxonomy’ released today by the Institute of International Finance (IIF), in a bid to combat a “proliferation” of industry terms.

“Taking sustainable investing mainstream will require a more durable framework for how the market labels these investment strategies,” said Fink. “Clearly articulating where an investment sits on the spectrum of sustainable investments will help all types of investors better align their capital with their goals.”

The IIF, chaired by Weber, counts senior figures from the world’s biggest banks on its board. Its 450-strong membership includes major insurers and asset managers like BlackRock.

“Simplification and standardization of sustainable investment terminology is crucial” — UBS’s Weber

Its new sustainable investment framework has three categories. They are ‘exclusion investments’ defined as actively avoiding investing in unsustainable corporates or countries based on screens or other ways to identify particular issues or outcomes of concern. And ‘inclusion investments’ defined as actively investing in sustainable corporates and countries based on consideration of the underlying data about issues or outcomes.

The third category is ‘impactful investments’ defined as those seeking to have a direct, positive, measurable impact on society and/or the environment while targeting market, or better, financial returns.

It was developed through the IIF’s Sustainable Finance Working Group (SFWG) in consultation with its members who said simplifying terminology could greatly advance the goal of scaling up sustainable finance.A paper from the IIF SFWG released today illustrates how the work comes in the context of world governments committing to the Paris Agreement and the UN Sustainable Development Goals (SDGs) and the connected sustainable investment opportunities.

But, the IIF says: “the financial services industry has inadvertently created a proliferation of terms that may confuse rather than clarify investment objectives and outcomes”.

The report highlights firms using close to 80 different terms to describe various forms of sustainable investment and investors avoiding sustainable products due to a lack of understanding.

The report also notes divergence between the Global Sustainable Investment Alliance (GSIA) and the PRI on defining sustainable investment and the volumes involved ($30.7trn and $80trn respectively).

The GSIA, a network of national social investment forums (SIFs), has its own sustainable investment framework with six categories.

The IIF framework catalogues commonly used terms in the sustainable investment world under three categories. Best-in-class screening is catalogued under ‘exclusion investments’ for example, while ESG is catalogued under ‘inclusion investments’.

Terms such as company engagement, active ownership and impact investing are catalogued under ‘impactful investments’.

The framework also catalogues impact investments where some market rate return may be sacrificed under the category ‘philanthropic investments’.

Going forward, the IIF will work with industry groups such as the PRI and GSIA to refine its framework and develop a common language.

“Simplification and standardization of sustainable investment terminology is a crucial part of the plumbing needed to grow sustainable finance,” said Weber, a former president of the Deutsche Bundesbank and a member of the European Central Bank Governing Council.